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Economic Outlook

By: Russ Colbert
Spring 2024 (Vol. 42, No. 1)

The economy is still growing. Real GDP came in last year over 3% and consumer spending finished strong. New home sales overall have come in above expectations and initial jobless claims are low. Durable goods orders are lower lately due to weak demand for some of the bigger ticket items. Meanwhile the stock market had a good rally this year until its recent pullback. This was partly due to the Federal Reserve putting off rate cuts that had been announced earlier this year. If the economy remains healthy and keeps expanding, it is very hard to believe the Federal Reserve will cut rates before mid-summer or the second half of the year. We could see a change if inflation continues to drop or there is a decline in economic growth. What would help move this stock market into a new territory would be to see improvement in areas such as Artificial intelligence and other new and advancing technologies providing a boost to productivity. This would keep growth strong and even accelerate it, while bringing inflation down. It will happen eventually. I just hope sooner than later.

Currently, we are tracking GDP growth above a 2.0% annual rate so far this year. This is close to the long-term average. Those figures for the first quarter will be released in a few weeks. At the same time unemployment remains below 4.0%. Inflation is currently averaging around 3.7%, down from a 9.0% high in mid-year of 2022. It rose from recent month lows. We must keep our eye on energy prices that have recently spiked upward due to the wars and other problems around the world. Real growth and inflation show little impact so far from the Federal Reserve current interest rate levels.

We have mentioned this before and need to keep a close eye on it. The government is running permanent, and very large deficits and using its budget to fund semiconductors, EV’s, solar, and wind generation, as well as redistributing more money to immigrants and students who are in debt. Many citizens feel that the best response to this as many were taught in a basic economics class, would be for the government to run a surplus, or at least work on shrinking the deficit, and the Federal Reserve to be a little worried about over-heating the economy. Instead, Congress just pushed through a $1.2 trillion dollar spending bill with a deficit that will approach $1.6 trillion, and the Federal Reserve announced that it is likely to cut rates three times in 2024. We also recently saw the latest inflation figures coming in higher than we thought, above 4%. The stock market seems to have decided that the Federal Reserve and the Federal Government can manage the economy to keep stocks up. We must be careful that this does not come at a price. No centrally managed economy has been permanently made to go only one way. It can look good for a time, but eventually the huge size of the government and mishandling of monetary policy catches up. The U.S tried in the 1970’s and the result was stagflation. It doesn’t happen overnight.

If the Fed is cutting rates because it is an election year, and if the government is spending money in an effort to entice some voters to see it as personally beneficial to vote for big government – it could be a recipe for lousy economic outcomes. When the government pushes money in directions that are politically beneficial, they are often not efficient in a true economic sense. This means less growth and more inflation. The markets may completely ignore it and investors may think the government has a recipe for prosperity. We will see what happens. We also have an election coming up soon that could cause some changes.

Russ Colbert
Senior Portfolio Manager

Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.